The Federal Energy Regulatory Commission dealt a blow to American Electric Power Co. Inc.'s plans to offload its Kentucky assets, but Wall Street believes the company still has several attractive options for accessing capital.
FERC denied the sale of Kentucky Power Co. and AEP Kentucky Transmission Co Inc. to Liberty Utilities Co. "without prejudice" on Dec. 15, saying the parties "have failed to show that the proposed transaction will not have an adverse effect on rates." (FERC docket EC22-26-000)
"Applicants' commitment to hold their customers harmless from costs related to the proposed transaction is not a substitute for identifying the effects of the proposed transaction on rates and demonstrating that such effects are not adverse," FERC wrote in its order.
The "without prejudice" ruling means the companies can make a new filing that shows how the proposed transaction will affect electricity rates.
"If the effect of the proposed transaction on rates is adverse, applicants should propose adequate ratepayer protection or mitigation to address that adverse effect, or otherwise demonstrate specific benefits due to the proposed transaction that offset such effect," FERC wrote.
American Electric Power, or AEP, spokesperson Tammy Ridout said the company is "disappointed with FERC's order ... as this sale provides benefits for Kentucky customers."
"We are thoroughly reviewing the order and are working with Liberty to determine the best path forward to securing FERC's approval of the transaction," Ridout said in a Dec. 16 email.
The company said there is no immediate change to its five-year financing plan or its overall strategy. AEP recently unveiled a $40 billion capital plan for 2023 through 2027 and expected to use transaction proceeds to help finance the plan.
Moving on?
Guggenheim Securities analyst Shahriar Pourreza said AEP is now expected to "accelerate its 2023 contracted renewables sale and the strategic review of its retail business."
AEP in late February launched a process to sell its competitive contracted renewables portfolio, which consists of 1,200 MW of wind capacity and 165 MW of solar capacity in 11 states. The investor-owned utility is separately pursuing a sale of AEP Renewables' 50% interest in the Flat Ridge 2 Wind Farm in Kansas.
Pourreza said the contracted renewables sale could net proceeds of $830 million to $1.1 billion.
"Obviously, whether the Kentucky sale ultimately proceeds or not will have some ramifications on AEP's financing plans, but we remind investors that the company has many other assets to select from (either in whole or in part via minority stakes), should it need to find alternative sources of capital," Pourreza wrote in a Dec. 15 research report. "We expect pressure on the shares in the near-term, pending additional visibility on the matter."
AEP's stock was down about 2% in midday trading Dec. 16.
Mizuho Securities USA pointed out that AEP's 6% to 7% earnings per share compound annual growth rate was based on $1.2 billion of cash proceeds from the sale of the Kentucky assets. The firm expects the companies involved in the deal to cancel the transaction.
"We believe AEP has other levers to pull, such as an acceleration of the renewables sale, to offset the loss of cash proceeds and believe management will move past the transaction," Mizuho analyst Anthony Crowdell wrote in a Dec. 16 research report. Crowdell also noted that shares of Canada's Algonquin Power & Utilities Corp., the parent company of Liberty Utilities, "rallied on the news, potentially highlighting limited shareholder support for the deal."
The last hurdle
The deal was the result of a strategic review of AEP's Kentucky assets, which the company launched in April 2021 as it looked to finance renewable energy additions.
Liberty Utilities and AEP reached an agreement for the two businesses in October 2021. The deal had an original enterprise value of $2.85 billion, including the assumption of about $1.22 billion in debt. AEP reduced the price by $200 million earlier this year to keep the transaction on track.
The Kentucky Public Service Commission approved the sale of Kentucky Power to Liberty Utilities in May, subject to several modifications including customer rate credits (Kentucky PSC Case No. 2021-00481). The Public Service Commission of West Virginia also approved the deal, which includes the transfer of Kentucky Power's 50% interest in the 1,560-MW Mitchell coal-fired power plant in Marshall County, W.Va.
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